CBOE's IPO made for members?

CBOE Holdings Inc.'s public offering appears to be more about funneling cash to members and showcasing the biggest U.S. options exchange to potential buyers than about raising capital to help it compete in a cutthroat market.

Regulatory filings for the stock sale say CBOE expects to use proceeds from the offering for general corporate purposes, but they also acknowledge that nearly all the proceeds could be returned to exchange members in two special tender offers after the IPO. CBOE also plans to let members, who will become shareholders, sell stock during the offering.

That may keep some potential investors away for fear the offering could be overpriced.

"They're going to try to get the best price for their selling shareholders," says Michael Shinnick, a fund manager for Salt Lake City-based Wasatch Advisors Inc. Mr. Shinnick, whose firm owns 550,000 shares of NYSE Euronext Inc., says he'll likely avoid CBOE shares at least until well after the IPO.

CBOE Chairman and CEO William Brodsky's push to take the company public in the first half of the year comes as competition heats up in the options industry, where six rival exchanges pushed CBOE's marketshare down to 31% last year from 45% in 2000. New York-based International Securities Exchange Inc., the CBOE's biggest rival, trails by just five percentage points. The competition is cutting into CBOE's profits, which declined last year for the first time in four years, to $106.45 million from $115.29 million in 2008.

The competition has grown alongside a jump in trading volume. CBOE's average daily volume has soared to 1.13 billion contracts last year from 22,462 in 1974, its first full year of trading.

"Even if volumes grow exponentially, the decrease in pricing may offset all of the volume growth," says Michael Wong, an analyst at Morningstar Inc. in Chicago.

While CBOE revenue rose last year, to $426.1 million from $416.8 million in 2008, it would have dropped if not for $24 million in access fees collected in prior years and deferred by litigation, the filings say. Meanwhile, CBOE is facing $300 million in costs from a legal settlement with CBOT members who claimed CBOE ownership and it must shell out a $113-million dividend payment to new stockholders.

CBOE says in the filings that it has "no current need for additional financing," although it also notes it's aiming for continued growth that "will require increased investment by us in technology, facilities, personnel, and financial and management systems and controls."

A company spokeswoman declines to comment.

To stay ahead in the "hypercompetitive" industry, every exchange needs constant technological upgrades, Mr. Shinnick says. One area where CBOE may need capital is in building a second, all-electronic options exchange it's calling C2 Options Exchange Inc., Mr. Wong says. The company has spent $23 million on the system over the past two years and hopes to launch it this year, according to the filings.

CBOE's cash and cash equivalents were $383.7 million as of the end of last year, up from $281.4 million at the end of 2008. The company says it doesn't have any short- or long-term debt.

Some investors may hope CBOE falls into the acquiring arms of CME Group Inc., a Chicago cousin that has been gobbling up exchanges. Jon Najarian, a trader who owns CME shares and is a CBOE seat-owner, says the IPO will facilitate that by setting a price and centralizing management.

"It would be a lot tougher to take the CBOE over prior to the IPO," Mr. Najarian says.